Small Business Unemployment Insurance

Unemployment insurance (UI), otherwise known as unemployment benefits, is provided by states to employees who have lost their jobs and meet certain eligibility criteria. Although eligibility for unemployment benefits varies depending on the state in general, employees can qualify for benefits if they lose their job through no fault of their own.

In this article, we’ll discuss the ins and out of unemployment insurance and how it affects your small business and its employees.

What is Unemployment Insurance?

Unemployment Insurance is a state-and-federally-funded program that provides employees who were involuntarily unemployed with monetary benefits and job search assistance for a limited period of time.


Unemployment insurance is designed to protect employees who get laid off from their jobs through no fault of their own. If that happens, the employee can make a claim for unemployment benefits, which is a weekly amount provided by the state based on a fraction of the person's wages or salary before they lost their job.


As an employer, unemployment taxes are paid for each eligible employee alongside state taxes. Benefits are then distributed by states, each of which has its own rules for eligibility.

How Does Unemployment Insurance Work?

Unemployment insurance is a joint federal-state program that provides weekly payments to people who are involuntarily unemployed and are actively looking for work. Each state is responsible for its own UI program and administering benefits to eligible employees. As a result, the rules governing UI vary considerably between states. However, to promote some uniformity and ensure that UI benefits are available nationwide, there are certain rules enforced by the US Department of Labor that all states have to comply with.

In general, self-employed individuals are not eligible for unemployment unless otherwise specified by their state. Regular unemployment benefits can last up to 26 weeks, although this period can be extended during times of high unemployment by the state, the federal government, or both.

For example, the US government extended state unemployment benefits during the COVID-19 pandemic. The exact amount of money received depends on what they were earning when they still had a job. However, it usually amounts to about half of their previous wages.

Who Pays for Unemployment Insurance?

Unemployment insurance is funded by taxes on employers. Small business owners pay taxes for unemployment insurance for each eligible employee that works for their business. The amount taxed can vary from period to period based on the number of active employees, whether employees are full-time or part-time, and other factors determined by the state. 

Both the federal government and the states assess unemployment taxes on employers. As a small business owner, there is no way to opt-out of unemployment insurance as it is required if you have employees and are included in taxes automatically.

When an employee files an unemployment claim, your business is not affected financially. Employees file unemployment claims with the state as opposed to filing a worker’s compensation claim or another type of lawsuit against your company directly. Because benefits are administered by the state, no further action is required by your business for employees to receive money. Business owners only need to answer any questions or correspondence regarding the employee’s status and termination sent by the state.

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Who Is Eligible for Unemployment Benefits?

Generally speaking, to qualify for UI, employees must:

  • Have lost their job through no fault of your own
  • Be able to work and actively look for work
  • Have earned a minimum level of wages and/or worked for a minimum amount of time during a specific period, called the “base period,” before losing their job

Because UI programs are administered by the states, specific eligibility rules vary considerably across the US. For example, some states don't allow part-time workers to receive UI benefits unless they look for full-time work. In addition, the base period differs from state to state.

Because of these variations, it's important for employees to check their state's particular rules for eligibility before they apply. Unemployment claims are filed in the state where an employee worked rather than where they live. If an employee lives in a state different than where they work, they may be able to file for unemployment benefits online, by phone, or by mail.

If an employee quits their job voluntarily or is fired for willful work-related misconduct, they won’t be eligible for unemployment benefits. Depending on the state, other reasons an employee might be denied unemployment include:

  • Misconduct unrelated to work
  • Declining an employer's offer of a suitable job different from current employment
  • Testing positive for controlled substances
  • Receiving severance pay, which can reduce or eliminate UI payments
  • Earning an income while still filing for unemployment
  • Not looking for work while receiving unemployment

Depending on the efficiency of the state's unemployment system and how many people are applying at a given time, it can take at least two or three weeks to start receiving benefits. Sometimes it takes longer, such as during the COVID-19 pandemic when many state UI systems were overwhelmed by applicants.

Once you are approved for benefits, you must file a claim every week or every two weeks in order to keep receiving them. As part of the filing process, you must usually demonstrate that you are looking for work in accordance with the state's rules.

When filing for unemployment benefits, you must take any suitable offer of employment that you receive, including freelance work. Refusing a job that you are able to do can disqualify you for UI.

Unemployment Insurance FAQ

Who is eligible for unemployment benefits?

Eligibility for unemployment varies by state. However, generally speaking, you will be eligible if you become unemployed through no fault of your own, meet requirements for wages earned or time worked during a specific period, and meet other requirements specific to your state.

What would stop me from getting unemployment benefits?

Depending on where you live, several things could disqualify you from receiving unemployment benefits. Quitting a job voluntarily, being fired for cause, work-related misconduct, misconduct outside of work, declining a suitable job at your current employer, failing a drug test, receiving severance pay, and not looking for work while you’re unemployed are some of the things that could prevent you from receiving benefits. Check the laws that apply to your state for a definitive answer.

Do you have to pay back unemployment benefits?

You don’t have to pay back unemployment benefits once you find another job unless you committed fraud or the state paid you benefits by mistake. Fraud can include, for example, failing to report wages you received while you were still collecting unemployment benefits.

Earned wages decrease the amount of unemployment benefits you are eligible for up to a certain amount, after which you aren’t entitled to any benefits. Other types of fraud include saying you’ve been looking for work when you haven’t or saying you’re unavailable to work when you are.

How Can Businesses Reduce Costs for Unemployment Insurance?

While small business unemployment insurance is mandatory, it doesn’t have to cost a fortune. There are many ways small business owners can keep federal and state unemployment taxes to a minimum.

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